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Contents 
Summary
Chapter
1 - The Oftel formula and formula returns
Chapter
2 – Cross-Subsidy in the Mobile Sector
Chapter
3 – Conclusion
Annex
– Respondents to the consultation Summary
Summary
S.1 Oftel has collected
financial data from Vodafone and O2 (formally BT Cellnet) on a quarterly
basis since May 1994, as part of its monitoring of unfair cross-subsidy
rules. The financial data (the formula return) is used as input to a
statistical test (the Oftel formula) designed to assess whether the
networks are cross subsidising their Tied Service Providers (TSPs).
S.2 In its consultation
The Oftel formula returns – December 2001
(the formula consultation), Oftel consulted on its view that the collection
of financial data for the Oftel formula would not be necessary or appropriate
if the Market Influence (MI) determinations were removed from Vodafone
and O2.
S.3 On April 5 2002,
the Director General of Telecommunications (the Director) published
determinations to remove the MI determinations from Vodafone and O2
(then BT Cellnet), Determinations to remove the
determinations that Vodafone and BT Cellnet have Market Influence under
Condition 56 of their respective licences (the MI determinations).
S.4 Following the
publication of these determinations, and taking into account the responses
received to the formula consultation, the Director considers it appropriate
to cease collecting the financial data for the Oftel formula from Vodafone
and O2. This document sets out in greater detail the reasons for this
decision and Oftel’s response to the points raised by respondents to
the formula consultation.
Chapter
1
The Oftel Formula and Formula Returns
1.1 In April 1997,
Oftel published its "Fair Trading in the Mobile Telephony Market"
Statement (the Fair Trading statement). This document described the
reasons for the Director’s decision to maintain on Vodafone and O2,
as operators with market power, the requirement to submit quarterly
returns to demonstrate compliance with the Oftel formula.
1.2 The Oftel formula
uses a discounting technique to assess whether a TSP is making an adequate
return over the life of a subscriber once the cost of acquiring that
subscriber has been taken into consideration. The average life of a
subscription is expressed in terms of high, medium or low ‘churn rates’.
Results for the Oftel formula are expressed in terms of pounds per subscriber.
1.3 If the Oftel
formula results in a positive value, then the TSP is earning a profit
for each subscriber. If the results are negative, then the TSP is making
a loss for each subscriber, implying a cross-subsidy from elsewhere
within the licensee’s Group.
Comments
by respondents
1.4 In its response
to the formula consultation, the Mobile Independent Service Provider
group (MISP), argues that the formula return is an effective, well established
and well understood mechanism of monitoring cross-subsidy in the mobile
sector. MISP states that the regular collection of financial data for
the Oftel formula provides Oftel with a source of readily available
information, which can be drawn upon should an allegation of unfair
cross-subsidy arise.
Oftel’s
response
1.5 The information
collected under the formula return could be used in investigating an
allegation of unfair cross-subsidy, but this information could also
be collected during the course of an investigation, in the same way
that most other information relevant to an investigation is collected.
Of course, should Oftel investigate an allegation of cross-subsidy in
the mobile sector, the well-established methodology of the Oftel formula
is still available regardless of whether or not the results are monitored
on a regular basis.
Market
Influence
1.6 In the formula
consultation, Oftel consulted on its view that in the absence of MI
determinations, it is appropriate to cease regular monitoring of the
Oftel formula.
1.7 Oftel published
determinations to remove the MI determinations on April 5 2002. In making
the determinations, the Director concluded that:
- there is evidence
to suggest that some operators will continue to supply service providers,
in the absence of a regulatory requirement to do so;
- there is no clear
correlation between successful Independent Service providers (ISPs)
and the MI regime; and
- the costs of
the MI regime outweigh the benefits.
1.8 Oftel considers
that there is no reason to continue to monitor cross-subsidy through
the Oftel formula in the absence of a regulatory requirement to supply
ISPs.
Comments
by respondents
1.9 In response
to the formula consultation, MISP and Centrica argue that there is no
evident link between the decision to remove the MI determinations and
the decision on whether or not to continue to collect the data to monitor
cross-subsidy using the Oftel formula.
Oftel’s
response
1.10 A view that
the monitoring of cross subsidy is required to prevent operators with
market power from forcing ISPs to exit the market is inconsistent with
the decision taken in the MI determinations. As explained in the Explanatory
Memorandum to the MI determinations, Oftel believes that in the absence
of regulation some network operators will continue to supply ISPs. This
view is supported by the fact that several ISPs have successfully negotiated
supply deals commercially, outside of the regulatory framework. Therefore,
Oftel considers that in the absence of a regulatory obligation to supply
active monitoring of cross-subsidy, through the Oftel formula, is unnecessary
and inappropriate.
Chapter 2
Cross-Subsidy in the Mobile Sector
2.1 Arrangements
to monitor cross-subsidy in the mobile market, through quarterly financial
returns have been in place since 1994. Changes in how the returns were
used to monitor cross-subsidy, by revising the Oftel formula, were made
following Oftel’s Fair Trading statement of April 1997. At this time,
One2One and Orange were relatively new entrants in the mobile sector
and Vodafone and O2 were established operators (with market shares of
around 40%), who had fully rolled out networks and significant first
mover advantages.
2.2 The monitoring
arrangements reflected the concern that, as Vodafone and O2 had market
power at the upstream network level, they could leverage this market
power into the downstream service provision level by unfairly cross-subsidising
their TSPs. Such leverage would result in the profit margin of ISPs
being squeezed as ISPs face the same wholesale charges as TSPs and must
compete with the retail prices of TSPs. Hence, ISPs faced the risk of
being excluded from the market.
Comments
by respondents
2.3 In their responses
MISP and Centrica argue that potential for unfair cross-subsidy between
the networks and their TSPs will increase, ultimately having a negative
impact upon retail competition in the mobile sector.
Oftel’s
response
2.4 Oftel believes
that the incentives and ability of Vodafone and O2 to unfairly cross-subsidise
their TSPs in order to reduce retail competition are reduced now that
Orange and One2One are fully established. For this reason, and for the
reasons given in the MI determinations Oftel no longer believes that
ISPs face the risk of being excluded from the mobile market by operators
cross-subsidising their TSPs.
Condition
66
2.5 Vodafone’s and
O2’s respective licences allow Oftel to require the provision of financial
information, should Oftel consider that there is evidence to suggest
that either operator has unfairly cross-subsidised one part of its business
from another part.
2.6 Condition 66
is a standard licence condition and therefore not reliant on a test
of market power. It will remain possible to obtain, on an ad-hoc basis,
such information relevant to determine whether there has been any unfair
cross-subsidy.
2.7 The provisions
of Condition 66 also cover a broad range of cross-subsidisation, and
not just the specific network to TSP cross-subsidy that is currently
monitored using the Oftel formula.
Comments
by respondents
2.8 In its response
Centrica argue that the data for the formula return should continue
to be collected to monitor the provisions of Condition 66. MISP also
suggests that the return should be kept for this reason and add that
by ceasing to collect the data, relying on ad-hoc requests as and when
required, Oftel would incur increased costs and workload that would
only serve to prolong cases, should they arise. MISP also questions
the justification behind what it sees as a shift in policy that means
operators deemed to have market power will no longer be required to
supply formula returns.
Oftel’s
response
2.9 For the reasons
set out in more detail in Chapter 1 and in the Explanatory Memorandum
to the MI determinations, Oftel does not consider that it is necessary
or appropriate to continue to monitor cross-subsidy through the Oftel
formula.
2.10 Furthermore,
Oftel does not consider that requiring information in relation to an
investigation following an allegation of unfair cross-subsidy on an
ad-hoc basis should prove any more difficult than requiring any other
necessary data.
2.11 The formula
consultation did propose that Oftel changes its policy on the collection
of the Oftel formula returns. It is not normal practice for Oftel to
consult on internal processes such as whether or not it collects regular
data, however as the Oftel formula has been subject to past statements
the Director considered it appropriate to consult in this instance.
Chapter 3
Conclusion
3.1 Having considered
the comments and representations made by the respondents to the formula
consultation, the Director remains of the opinion that the regular collection
of the formula return for the Oftel formula is no longer appropriate.
3.2 The Director
considers that the evidence and reasoning supporting the decision to
remove the MI determinations also supports the decision that it is inappropriate
and unnecessary to continue to require Vodafone and O2 to continue to
supply data for the Oftel formula.
Annex
Respondents to the consultation
O2 (formally BT
Cellnet)
Vodafone
Mobile Independent Service Provider group (MISP)
Centrica
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